Since many hedge fund managers like to drive Porsche roadsters, it's somehow appropriate that the German auto maker just ran them down.
The European hedge fund community took a pounding Monday covering short positions in Volkswagen. Shares in the auto company doubled Monday on a short squeeze that came after Porsche announced it had used derivatives to build a 74 per cent stake in VW. That move brought a long-running takeover near the finish line, and also meant portfolio managers betting on a drop in Volkswagen shares had to cover positions.
In their rush to cover shorts, often at massive losses, hedge funds pushed up the value of Volkswagen by 123 per cent on Monday, briefly making the auto maker the largest company on earth. Shares subsequently slipped, but ended the day up 25 per cent.
A handful of deals gain infamy for the widespread damage they inflict on hedge funds. GE's failed bid for Honeywell is in this hall of shame. Monday's nightmare on Volkswagen seems certain to gain the same notoriety. Given the fragile health of the community, losses on Volkswagen positions will be a fatal blow for some European funds.
The squeeze on Volkswagen is partly due to the fact that the company has a relatively small public float, with just 5.8 per cent of the stock in public hands after Porsche's move.
The Financial Times quoted Max Warburton, an analyst at Sanford Bernstein, saying the short squeeze had brought the German market into disrepute. "It is a huge question for regulators and arguably an embarrassment for all European capital markets."